Doc’s note: This week, I’ve opened a five-day workshop on the Eifrig Income Method… A strategy I’ve learned and perfected since my days on Wall Street.
It’s a method everyone should know how to use. That’s why in today’s essay, originally published last year, I explain the greatest income-producing tool.
And if you want to learn more about the Eifrig Income Method, and gain access to a special presentation this Thursday, click here.
If you can understand real estate, you can understand the greatest income-producing tool for retirees.
Right now, my Retirement Trader readers understand this tool… These are regular investors (just like you). And they’re using this tool to pull thousands of dollars out of the market every month.
You can do the same…
It all starts with the familiar real estate idea of offering owners a lower price than what they are asking for…
This strategy involves one of the most powerful – and misunderstood – financial tools ever created: stock options.
When most folks hear the words “stock options,” they think of risky bets on volatile moves in the stock market.
Nothing could be further from the truth.
A stock option is simply a contract between two people. One type of option is called a “call option”…
- The person who buys a call has the right – but not the obligation – to buy a stock at a given price, in a given time period.
- The person who sells a call has the obligation to sell a stock at a given price, in a given time period.
Done properly, selling call options is one of the greatest money-making strategies ever created. And it’s simple, once you get the hang of it.
Essentially, you can think of it as you are acting like a “stock market landlord.”
Conventional landlords collect regular income on properties they own. It’s a time-tested plan for getting a good, double-digit annual yield on your money. You also collect income on properties you own. Except these properties are in the stock market. You collect income while you own them and you have the potential to get bought out if prices rise.
That means that unlike conventional real estate investing, this type of investing doesn’t involve bank loans, fixing toilets, or dealing with tenants at 2 a.m.
Here’s how it works…
After you buy a stock, you can enter the options market and sell someone the right to buy your stock at a higher price in the future. In return for agreeing to sell your stock, you collect cash up front.
Using options this way has nothing to do with the risky, “all or nothing” options strategies many people use. This is a very safe strategy. It’s called “selling covered calls.”
This amounts to buying shares, then selling someone else the right to buy the shares from you at a higher price. I know it might sound like a strange transaction. But it happens millions of times a day…
Let me walk you through some numbers, so you can see how useful a tool it is if you’re looking for safe income…
In July 2016, I told my readers about an opportunity to become a “stock market landlord” with shares of big-box retailer Target (NYSE: TGT). At the time, you could buy TGT for about $70.90 per share. Let’s say you bought 100 shares at the time, for a total of $7,090.
Right after buying your shares, you were able to sell someone the right to buy your shares from you for $70 per share any time over the next three months. You collected $3.25 per share ($325 per contract) for selling that right. And this $325 payment represented an instant 4.6% yield on your investment ($325 / $7,090 = 4.6%).
In October, you were able to buy these calls back and sell another set of calls (the TGT January $70 calls) for a net credit of around $1.40. Again, that’s like a $140 “rent payment” that you get to put in your pocket.
Then in December, right before Christmas, I recommended buying these TGT calls back early – selling the January $70 calls for a net credit of around $69.50, collecting nearly your maximum gain on the trade and freeing up your capital.
All told, you could have earned a safe return of 6.3% on this trade. And if you could put it on about twice a year, you’d earn nearly 13% annualized.
On a $50,000 stake, that’s about $6,300 each year. (Good luck finding a $50,000 house to rent out and make that much each year.) More important, we’re not tied down to one building like we would be with a real estate investment…
We sell options on what I call “sleep well at night” stocks (SWAN stocks).
SWAN stocks are companies and businesses that held up in the latest recession and are improving as the global economy putters along. They have strong balance sheets, good cash flows, and long histories of rewarding shareholders through dividends and buybacks. These companies are also often leaders in their industries.
We’re collecting cash by making discount offers on great businesses that are rarely accepted… And when they are accepted, we’re able to use the covered-call strategy to generate even more cash.
Of course, this strategy takes a little bit more work than what you might be used to… But as many of my readers have discovered, it’s simple to learn… and simple to use once you get the hang of it.
Becoming a “stock market landlord” is well worth the extra effort.
If you’d like to learn how to “rent out” great businesses in 2018, click here for the Eifrig Income Method workshop.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 5, 2018